by: Wes Ismael

“Analysts and producers alike are keenly monitoring ongoing adjustments in economic fundamentals underlying cattle markets,” says Glynn Tonsor, agricultural economist at Kansas State University (KSU), in a mid-September issue of In the Cattle Markets. “While some of the recent cattle price declines are associated with recognition that the industry is—albeit slowly—moving out of the tight-supply situation of recent years, arguably, the biggest driver of downward price pressure has been expanding bearish sentiment regarding global economic strength and associated impacts on beef demand. As bearish signals on beef demand grow, market forces result in downward pressure on cattle prices throughout the entire supply chain.”

Certainly, the recent downturn in cattle prices is driven by seasonal factors in tandem with macroeconomic forces, but it also has plenty to do with domestic and international demand.

“Presuming the industry progresses forward increasing the breeding herd—leading to larger beef supplies—the persistently critical role beef demand plays in cattle and beef prices will become increasingly clear,” say Tonsor and fellow KSU agricultural economist, Ted Schroeder, in their recently published Beef Demand Prioritization factsheet. “If demand continues to grow, an optimistic scenario would be relatively small reductions in prices as expanding beef demand could absorb larger volumes without realizing substantial price declines from current levels. For a variety of reasons, we do not believe beef demand will grow sufficiently in the next few years to fully offset the expected rate of growing supplies. In other words, we expect lower fed cattle and beef prices than recently observed. However, that does not suggest strategies designed to strengthen beef demand are not worthy investments. In fact, striving to grow demand as supplies increase is immensely important to industry profitability.”

What beef demand is and isn't

In the factsheet, Tonsor and Schroeder describe key areas that merit industry focus for prioritizing beef demand efforts. At the top of their list comes the need for everyone associated with the cattle business to understand demand concepts.

“Any assessment of available information on beef demand must start by clarifying what beef demand is, and what it is not,” Tonsor and Schroeder say. “Building overall understanding of demand concepts is necessary for informed, collective decision making and investment prioritization efforts…To effectively prioritize demand growth strategies requires a well-grounded understanding of what demand is, as well as how and why it changes.”

Tonsor shares some key points developed two decades ago by Wayne Purcell, an alumni distinguished professor emeritus of agricultural and applied economics at Virginia Tech University. These rules are as germane and valuable today:

• Per-capita consumption is not a measure of demand.

• Talking about strong demand when increased quantities are being taken at sharply lower prices is wrong and misleading.

• If demand is constant, the only way an increased per-capita supply will be taken by consumers is at lower prices.

• You cannot use high beef prices as a reason for weak beef demand since price is part of the demand schedule.

• If demand is decreasing, the only way to avoid losing market share is to reduce costs enough to keep the business viable.

• A prolonged period of decreasing demand for beef will eventually exceed even the most efficient producer's ability to cut costs.

• Significant changes in pork and chicken prices can and will shift beef demand from year to year and within the year.

• Changes in consumers' incomes are usually positive for beef demand, but rising incomes during the 1980s and 1990s have not offset other problems.

• The facts support a conclusion that, since 1979-80, consumers' preferences have turned away from beef as their needs and lifestyles have changed. (Editors note: Keep in mind, these rules were written when beef was on the way to losing an average of one percent beef demand every year for 20 years. Beef demand has increased for the past several years, but remains below the demand levels of 1990 as measured by the All Fresh Beef Demand Index).

• If these pervasive problems are not fixed and the negative trend in beef demand isn't at least stopped, the beef sector will lose market share and will trend toward a smaller industry for the foreseeable future.

• It is time to do something, time to understand, time to get the product offering moved toward what the modern consumer wants and is willing to pay for.

International demand is critical to U.S. markets

Another priority highlighted by Schroeder and Tonsor in their factsheet is the need to assess international demand prospects.

“Attracting new consumers to the market demanding U.S. beef is one of the most effective and rapid ways to build overall demand,” Tonsor and Schroeder explain. “What is notably less well understood is exactly which countries or regions present the best opportunities...”

Headwinds faced by U.S. beef exports so far this year, due to a number of factors—the strengthening U.S. dollar, repercussions from China's currency devaluation and trade barriers—underscore their critical role in establishing and maintaining beef value.

Although exports still accounted for a robust $289.41 per head of fed slaughter—up four percent year-over-year (January to July)—volume for the same period was 10 percent less year-over-year and value was two percent less, according to the U.S. Meat Export Federation. Beef exports in July were 10 percent less than the same time a year ago, the least since 2010.

Consumers rule

Schroeder and Tonsor emphasize that assessing the demand implications associated with changing U.S. consumer households is also a priority. They share insights from the 2015 Power of Meat report:

• “Millennials place much higher importance on preparation knowledge, time and ease, while shoppers over 65 years of age place much more importance on price and appearance.

• “Lower income households are more focused on price while higher income households focus more on nutrition and appearance.

• “The role of preparation knowledge has increased substantially in decisions to buy fresh meat. This likely reflects a broader change in the food cooking and preparation habits and skills of today's U.S. residents that is likely impacted by underlying household composition changes.

• “The choice of market channel increasingly matters as supercenter meat shoppers place less emphasis on appearance, nutrition, and preparation time/knowledge and extra emphasis on total package price compared with supermarket channel meat shoppers.”

“Moreover, what is not thoroughly understood are subsequent implications on what strategies make most sense to position the beef industry to realize beef demand growth given these ongoing population and household composition adjustments,” Schroeder and Tonsor say. “Certainly, positioning the industry and tailoring products to fit highly diverse lifestyles and preferences of modern consumers does not have simple, single-dimensional solutions.”

As always, consumer perceptions of the food safety and product quality remain a priority.

According to previous research conducted by Schroeder, Tonsor, and Jim Mintert at Purdue University, food safety and product quality rank highest in terms of demand drivers relative to realized demand and the ability of the industry to influence demand.

“Many consumers have lingering doubts or uncertainty regarding beef product food safety,” Tonsor and Schroeder say. “…the general consuming public does not have the time or expertise to sort facts from confusing, wrong, or undocumented claims. Such consumer perceptions and preferences are driving major food processors, food retailers, food service, and policy makers to impose major changes in how food, including beef, is produced, processed, and marketed. Helping consumers sort out fact from fiction through very visible information campaigns, being part of the leadership in board rooms as major food companies develop supplier expectations and requirements, and being a leader working with producers to bridge the gap between producer and consumer interests are valuable initiatives.”

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